In an attempt to check the fall in the rupee, the finance ministry has directed private and state-owned banks to ?stop? arbitraging between the offshore non-deliverable forward market and the local spot market.
Experts said the measure could help arrest the rupee?s fall, but would be difficult to implement. Mostly foreign banks, global currency hedge funds and large Indian corporates trade in NDFs in overseas markets such as Singapore, New York, Hong Kong and Dubai, to cash in on the difference between the onshore and offshore INR price.
Insiders said PSU banks’ participation is somewhat limited in the NDF market.
Permitting qualified foreign investors (QFIs) to buy Indian stocks directly from the exchanges and opening a forex swap line are among other measures the government is contemplating to arrest the rupee’s fall. In order to attract capital flows, RBI has already eased overseas borrowing rules, raised rates on NRI deposits, and announced plans to remove the limit of $100 million on net supply of foreign exchange through rupee swaps to facilitate hedging.
On Thursday, the rupee snapped an eight-session losing streak and ended at 52.065/075, 0.6% above Wednesday’s close of 52.36/37, as a result of the measures taken by RBI over the past couple of days. The rupee has dropped nearly 17% from its late-July peak, and is the worst-performing currency among major Asian economies.
The NDF market, which is largely outside the purview of domestic regulators, has over the years become larger than the local spot market. ?There is an arbitrage opportunity that exists as there is price difference for INR in the offshore NDF market and the onshore spot market,? said Naveen Mathur, associate director, commodities & currencies, Angel Broking.
One-month offshore NDF contracts were quoted at 52.40, indicating a bearish short-term view on the on-shore spot rate. In the local currency futures market, the most traded near-month dollar-rupee contracts on the NSE, the MCX-SX and the United Stock Exchange ended at 52.1275, 52.1175 and 52.1075, respectively on Thursday.
Volumes in the NDF market has grown over the years and crossed the onshore market. In April, NDF volumes were at $43 billion a day, more than double the onshore $21 billion a day recorded in the onshore OTC market in the same month.
?Foreign banks trade in INR in the NDF market, where the settlement happens in Singapore dollars or other currencies. Actually, no transactions or deliveries happen in INR, and traders only take ‘directional calls’ on the price of the INR. Many foreign banks and even private banks advise their clients to do that,? explained a forex expert with a leading local forex firm, who asked not to be named.
?In a sense, you can say that INR price discovery has migrated offshore. And this offshore market has contributed to the rupee’s fall,? he added.
However, market players admit that containing the NDF market and bringing it onshore would be easier said than done.
?The RBI has been trying to do this for years now but has somehow not succeeded,? a market player said.